Short sale option: lease-to-own

Question:

I am considering a relocation move, and just had an appraisal done on my townhouse. It came in at $419,000, which means that I am about $15,000 underwater on the property. I don’t know if I could sell at the appraisal value, as there have been no comparable sales in my neighborhood for 18 months.

My combined monthly payments are about $3,300 versus a potential rental income of about $2,400 to $2,600, before expenses. I can afford the monthly payments and am current on all debt. But if I sell, I won’t have enough money to cover the mortgage shortage and sales costs with some safety net of savings. What factors would the bank consider in relation to allowing a short sale? Does it make sense to rent my place out if I relocated?

Answer:

For a bank to consider a short sale, you must owe more than your house is worth and demonstrate hardship. You meet the first test, but it doesn’t sound as if you meet the second. Examples of hardship include divorce, job loss, sudden illness, bankruptcy or the death of the family breadwinner.

However, even if you can prove hardship, you will need to disclose your complete financial situation to your lender by providing a copy of your tax returns and other financial records going back for at least two years. If it appears that you can pay the difference between the sales price and what is owed, you’ll probably be on the hook for the shortfall, though you may be able to negotiate a discount.

Lenders are more likely to consider a short sale when owners are not current on their mortgage payments—though I am not suggesting you stop making payments, as this will hurt your credit rating.

Of course, if the lender does grant a short sale, your credit will take a big hit, too. Plus, you probably will have to wait at least another two years before you can buy another home—although that will be less time than the five or more years you would have to wait if you allowed your property to fall into foreclosure.

You will also have to find a buyer who is willing to buy your house at a price that the lender will accept, and who has the patience to wait out the long and often frustrating approval process.

Suggestion:

All of this suggests to me that you would be better off trying to rent out your home. Try offering it as “lease-to-own,” where the renter pays a premium on top of market rent, plus a fee that runs between 1 percent and 5 percent of the home’s purchase price, in return for an option to buy the home later (usually within three years) at a pre-negotiated price. For buyers who have blemished credit, this can provide an opportunity to live in the home they want while rebuilding their credit scores. If they eventually buy the home, the rent premium and option fee are applied to the purchase price. You, meanwhile, will benefit from the continued mortgage interest deduction during the option period.

If at the end of the option period, the tenant buys the home, you lose the rent premium and option fees, but save the cost of brokers’ fees. If the tenant doesn’t buy, you keep the premium and fees. Either way, you win.

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